US Treasuries rose while European and UK government bonds drifted lower on Thursday in pre-holiday trade. US Treasuries were helped by a weaker-than-expected report on industrial activity in the US mid-Atlantic region and pushed higher on news of a potential terror attack in London this weekend.

The Philadelphia Federal Reserve Bank’s index of business activity fell to minus 4.3 in December from 5.1 in November, the third negative reading in the past four months.

Analysts had forecast a gain of 4.0. A reading below zero indicates contraction in the region’s manufacturing sector.

Investors had earlier largely shrugged off better-than-expected unemployment data and a downward revision to third-quarter growth in gross domestic product.

Third-quarter GDP grew 2 per cent annually, which was revised down from a previous estimate of 2.2 per cent, mainly reflecting a downward adjustment to consumer spending.

By late afternoon in New York, the yield on the benchmark 10-year bond was 4.3 basis points lower at 4.557 per cent. The two-year note yield was down 5.5bp at 4.666 per cent.

UK gilts saw prices drop back after the previous day’s gains and shorter dated issues suffered most after official figures showed that the UK economy grew at its fastest annual rate in two years during the third quarter. GDP growth was estimated at 2.9 per cent, up from 2.7 per cent in the previous quarter’s estimate.

The report helped to firm expectations that the Bank of England will have to
raise interest rates early in 2007. Two-year gilt yields were 2.9bp higher 5.171 per cent, while those on 10-year gilts were up 0.3bp at
4.717 per cent.

European government bonds also declined a touch, with the yield on the two-year Schatz up 0.1bp at 3.840 per cent and that on the 10-year bund up 0.9bp at 3.870 per cent.

Prices continued to rise on Japanese government bonds on diminished expectations of an imminent rate rise following dovish comments this week by Bank of Japan governor Toshihiko Fukui.

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